Tencent’s freemium model sets it apart, and still has room to grow

How can a software company combat the threat of internet piracy? One strategy – which Chinese mobile gaming giant Tencent has used to great effect – is to give them away for free. After all, you can’t steal something that’s free. This obviously raises the question of where revenues come from, and the answer is in-game purchases. In Tencent’s world, the game is free – but the add-ons (like extra levels, equipment, and functionality) comes at a cost. This business model, which is shaking up the video game industry, is called ‘freemium’.

The best example of Freemium’s potential might come from Tencent’s “Honour of Kings”, which is widely believed to be the world’s top-earning smartphone game. This game is free, but players have the option to use real money to buy virtual items within it.

Tencent has pioneered this shift, which moves away from the traditional ‘one-time-purchase’ of video games that we’re all familiar with, and into a subscription model. It’s becoming popular in the west too, as Electronic Arts transition to digital sales has contributed to impressive revenue growth in most recent quarter.

In Tencent’s case, the video games in question are on mobile platforms. This has let it tap into the huge growth of ‘casual gamers’ – people who, perhaps, don’t play traditional video games on a laptop or console, but spend their hours commuting tapping away on a free game from the app store.

In the first quarter of the year, Tencent’s revenue from smartphone games rose by over 50% to $2 billion dollars. But the worldwide video game industry is worth $100 billion, and Tencent has plenty of room to grow outside of China. Can China’s premier smartphone game provider become worldwide top dog?

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